International Trade Financing Is What Makes the World Go Round
Trade financing is one of the world’s oldest forms of banking and has grown as a driving force behind global trade today. Nearly $15 trillion of international trade transactions depend on this specialized form of loans and guarantees each year. In the dawn of international trade, it was impossible to guarantee trust between exporters and importers. Exporters had no way of knowing that goods would be paid for once shipped, and importers couldn’t guarantee goods would arrive if payment was sent in advance. Early forms of trade financing were as simple as engraved tablets that could later be exchanged for silver once transactions were completed. Today, trade financing is far more complex and supports traders throughout elaborate supply chains. The industry involves numerous players who offer different instruments to ensure that production and trade can continue to flow.
How it works
In its most basic form, trade financing involves intermediaries who guarantee payment upon delivery of goods. Banks often play this intermediary role by issuing letters of credit on behalf of importers to guarantee funds are available for payment once a bill of lading is produced. Banks also may lend to exporters who secure loans using their accounts receivable as collateral. This allows exporters to continue producing goods while waiting for payments. With the backing of local banks and its reputations, international trade transactions have decreased in risk. Other forms of trade finance involve factoring and forfeiting. Factoring allows an exporter to sell their accounts receivable at a discount to a factor, or trade financier, in order to accelerate cash flow. The trade financier makes a profit once the importer has paid their invoice in full. Similarly, forfeiting allows exporters to sell the credit they’ve extended to an importer to a third party and receive cash immediately.
Benefits of Trade Financing
Trade finance’s main purpose is to keep cash flowing for all parties, so that they can continue to conduct business while trade transactions are in process. The process mitigates risk for exporters who may not be able to recover goods once they’re shipped because of non-payment. On the other hand, importers can be guaranteed that funds won’t be released to an exporter until delivery of goods is received. Trade financing reduces pressure for both parties because it enables exporters to continue to purchase raw materials for their products, while, importers can continue to buy products while they wait for their inventories to sell.
As one of the oldest forms of banking, trade finance also tends to be rather traditional and tedious to transact. Throughout the finance chain of banks, insurers, warehouses, and customs brokering, endless forms are required at each point. According to The Economist, on average, 36 original documents and 240 copies each need to be produced for every transaction. All of these products help to reduce risk, but can become costly quickly. Late payments may also detract from a business’s bottom line. Exporters who rely too heavily on invoice discounting may also become over exposed to changes in economic cycles. Keeping track of where a business stands throughout its trade financing chain, while producing endless documents, can be an onerous task for any company, however large or small.
While the trade finance industry has been slow to change, digital apps and data collection are making it easier for exporters and importers to track their transactions. Moselle’s platform eliminates most of the tedium involved in trade financing by centralizing all transactions and data collected by a company into one dashboard. Because the platform is digital and paperless, it helps keep businesses on top of their receivables and payables and allows them to track and predict cash flow at a quick glance. Users can even apply for trade financing directly through the platform using the supporting data within the dashboard, a capability that finally brings trade finance into the 21st century.